What are restrictive covenants in employment contracts?

Restrictive covenants in employment contracts are invaluable clauses which protect the business interests of an employer after the termination of an employee's employment. Broadly speaking, a former employee of a business will remain bound by a valid covenant and will be restricted from engaging in certain activities in accordance with the drafting of the clause.

By way of example, an employer might want to restrict their former employees from "soliciting" the clients of their business in a subsequent role or exploiting sensitive business information to which they might have been privy.

One can imagine the frustration and the financial blow of valued clients being poached from a former employee or the devastation of your competitors now being in possession of your trade secrets!

Putting a valid restrictive covenant in place when employing new members of a business can help avoid a number of calamities, as well as clarifying the position of the employer and employee from the outset.

Careful drafting

Although creating such a restriction can be a wise move on the part an employer, careful drafting of restrictive clauses is imperative.

There are numerous formal elements which must be satisfied in order for a court to find that a restrictive covenant is legally binding and the court will not enforce clauses which do not adhere to the formal requirements.

Enforcement and remedies

A clear advantage of incorporating a restrictive covenant into a contract of employment is that it gives the employer the option to seek an injunction against the former employee. This course of action operates to prevent damage, such as "solicitation" of clients or exploitation of sensitive information, before it is caused by the former employee.

In those instances where the legitimate business interests of the employer have been damaged, the employer will have a right to seek compensation. However, the availability of either avenue of redress rests almost entirely on the proper drafting of the restrictive covenant in question.

Decorus Ltd v Penfold & Arnor

In some cases, employers might seek to create a restrictive covenant sometime after entering into the contract of employment with their employee. This course of action makes the process more complicated. The Judge in the High Court in the Decorus Ltd v Penfold & Arnor [2016] EWHC 1421 (QB) case recently clarified the law on this point.

In this case, Mr Penfold, the defendant, was the former Sales Account Manager of Decorus Ltd. After leaving Decorus Ltd, Mr Penfold joined a new company which was also a competitor of his former employer. Whilst in this new position, it came to light that Mr Penfold had contacted and poached the clients of Decorus Ltd.

During the course of Mr Penfold's employment with Decorus Ltd, Decorus Ltd introduced a new employment contract which contained a restrictive covenant. It fell on the Judge in that case to decide if the restrictive covenant was valid.

On the facts of the case, the Judge ultimately decided that the restrictive covenant was valid. One of the reasons why the covenant was held to be valid was due to Decorus Ltd having given Mr Penfold a pay rise at the time the covenant was introduced.

In order for an employer to introduce a restrictive covenant after the commencement of an employees' employment, the employer must, amongst other things, provide consideration for the imposition of the future restriction. The Judge considered that the pay rise, and other factors, amounted to providing fresh consideration for the introduction of the restrictive covenant. As a result, the restrictive covenant was held to be enforceable and Mr Penfold was therefore bound by it in his subsequent position.

By contacting the clients of Decorus Ltd, Mr Penfold was in breach of his ongoing obligation contained in the restrictive covenant. Finding against the defendant, the High Court ordered Mr Penfold to pay compensation to Decorus Limited in the sum of £29,852.17.

Implications

The finding in the Decorus case shows how much can be at stake when a dispute arises after the termination of employment, but it is important to remember that any potential claim depends entirely on the validity of the restrictive covenant.

From the outset, it is vital to have a carefully drafted contract of employment to ensure that your genuine business interests are protected. Careful drafting can simplify bringing a claim in the future.

At Clapham & Collinge, our dedicated commercial team can advise you on restrictive covenants in employment contracts and provide you with information, support, and assist you in the drafting of employment contracts. For more information, please call us on 01603 693500, email us using 'Make an enquiry' form, or during offices hours use the 'live chat' facility. Appointments available at our Norwich, North Walsham, Sheringham and Brooke office.